US Dollar rallies against major currencies ahead of Fed interest rate decision

Enrique Díaz-Álvarez28/Oct/2015Currency Updates

British and European businesses will be eagerly awaiting this evening’s Federal Reserve interest rate decision. The US Federal Open Market Committee (FOMC) is scheduled to announce its October interest rate decision at 2:00pm ET (6:00pm in the UK), following its two-day monetary policy meeting.

Businesses await the effect of the announcement on the cost of doing business in the US and the flow-on effect that this will have on other overseas markets. Although there is no hike expected, the tone of the Fed’s Monetary Policy Statement will be a key indicator as to when they are likely to increase the benchmark interest rate within the world’s largest economy.

We forecast a US interest rate increase in December. This should lead to long-term support for the US Dollar. So an organisation that has a requirement to buy Dollars and isn’t budgeting for a much stronger Dollar, may want to evaluate its foreign exchange risk.

The tone of the Monetary Policy Statement will likely foreshadow the direction of the US Dollar against its peers, leading to the strong possibility of Dollar volatility in the short term. If a hawkish statement is delivered, one that downplays the recent poor data as a mere blip, the door would be open for a December rate hike, and therefore provide good support for the Dollar this week.

On the contrary, a dovish report, reaffirming the uncertain economic outlook and no mention of a December rate hike is likely to lead to a short-term weakness of the Dollar. Therefore, an organisation looking to transact with Dollars this week could look beyond a simple spot transfer and consider other products that would enable the capture of any upswings in the currency market this week or, indeed, mitigate any negative moves.

In other news, businesses within the Eurozone have continued to feel the pinch of a weakening currency since the ECB’s announcement last week that they would enhance their economic stimulus package. This effect on profitability and/or the cost of purchasing overseas is expected to continue as the ECB becomes increasingly worried about the threat of deflation.

Major currencies in detail:


Sterling weakened by 0.2% against the US Dollar yesterday following weaker-than-expected growth figures.

The latest GDP figures showed that UK economic growth slowed in the third quarter of the year to 0.5%, from an originally quoted 0.7% expansion, in line with the PMIs released during the three months to September.

Economic expansion also surprised on the downside on an annualised basis, at just 2.3%. The British economy continues to be driven by the giant services sector, which expanded by 0.7% compared with the previous three months. By contrast, the manufacturing sector continues to falter, and is in recession again, having contracted for the past two quarters, driven lower by a strong Pound.

However, despite yesterday’s miss, growth remains enviably strong. Combined with a tightening in labour market conditions and an improvement in the housing market, the Bank of England still remains on course for an interest rate hike at some point in the second quarter of 2016.

No major data out of the UK economy today means that all eyes among Sterling traders will be on the Federal Reserve decision this evening.


The Euro dipped marginally by 0.1% versus the Greenback yesterday, despite a lack of major Eurozone data.

The Euro has mostly taken a back seat since the ECB all but announced it would be expanding its quantitative easing programme last week. Yesterday morning the latest data representing the growth of loans to the private sector in the Euro-area, a broad gauge of economic health, suggested that the economy may be losing momentum. Loans increased by just 0.6% in September compared to a year previous, according to the ECB.

Mostly second-tier economic data again in the Eurozone this morning including consumer confidence in Germany, France and Italy, should mean that Euro volatility could be relatively low before this evening’s FOMC meeting.


The US Dollar rallied by 0.2% against its major peers yesterday ahead of tonight’s announcement, despite evidence that the US economy is slowing.

We don’t expect the Federal Reserve to hike this evening, and interest rate markets agree strongly with this forecast, pricing in less than 5% chance of a hike being announced tonight. The October labour market report showed job creation slowed below 200,000 in the past four months, inflation remains persistently low, while the slowdown in emerging market economies will again likely be a factor. The tone of the statement, however, remains key, with traders looking for any indication of a December lift-off, something that would likely provide strong US Dollar support.

We maintain our call for a Fed rate increase in 2015 at the December FOMC meeting, provided we see an improvement in the next two labour reports and job creation in excess of 200,000 a month.

In the lead up to today’s meeting, there was a string of economic data released on Tuesday. Consumer confidence dipped this month from an index of 102.6 to 97.6, its lowest in three months. Meanwhile, despite surprising to the upside, durable goods orders also retreated again in September. Orders for durable goods fell by 1.2% last month, marking its second straight month in negative territory. Both leading indicators will be further bad news for Federal Reserve hawks ahead of December’s FOMC meeting.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.